$4 Trillion Obama Budget Challenges Republicans on Income Gap

(Bloomberg) -- President Barack Obama sent a $4 trillion budget blueprint to Congress that would raise taxes on corporations and the nations top earners, fund major investments in infrastructure and education and stabilize, but not eliminate, the annual U.S. budget deficit.

The plan challenges Republicans to make politically thorny choices between defending current tax rates for the wealthy and Obama's proposals to boost spending for the middle class, the Pentagon and companies that build domestic infrastructure.

That's exactly the ground Democrats want to fight on heading into the 2016 elections. Addressing income inequality has become a mantra for Democrats from Obama to 2016 presidential nomination front-runner Hillary Clinton, and some of the Republican contenders have taken up the issue as well.

The budget plan for the fiscal year starting Oct. 1 backs up Obama's recent talk about directing assistance to the middle class with tax breaks and programs for education, job training and child care, administration officials said. Rather than dialing back his goals after Republicans expanded their House majority and took control of the Senate in Novembers midterm elections, the president is pursuing a more aggressive strategy.

Republicans were out with criticism even before the budget documents arrived at the Capitol.

'ENVY ECONOMICS'

"What I think the president is trying to do here is to, again, exploit envy economics. This top-down redistribution doesnt work," Representative Paul Ryan of Wisconsin, chairman of the House Ways and Means Committee, said on NBCs "Meet the Press" on Sunday. "It may make for good politics. It doesnt make for good economic growth."

Congress is under no obligation to follow Obamas budget plan, and most of his major proposals will be ignored by House and Senate Republicans as they form their own blueprint for spending and taxes.

Obama's plans to assist lower- and middle-income taxpayers include underwriting the cost of community college for most students, tripling the child tax credit for families with kids under 5 years old, and creating a $500 "second earner" tax credit for families in which both spouses work. He had more room to do that without adding to the deficit as job creation brings in more tax revenue and the economy keeps expanding.

DEMOCRATIC SUPPORT

"His emphasis is on growing jobs and boosting paychecks, but doing it in a fiscally responsible way," Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee, said in an interview Sunday. "He'll have broad and deep support from Democrats."

The president's fiscal plan would result in a 2016 deficit of $474 billion, according to administration officials. The shortfall would represent 2.5 percent of gross domestic product, a level that many economists regard as sustainable, down from a projected 3.2 percent in fiscal 2015. It wouldn't rise above 2.6 percent of GDP in any year for the next decade under the president's budget, even as the absolute numbers rise.

Those figures are substantially less that the record $1.4 trillion deficit in 2009, the year Obama took office and the U.S. began pulling out of the worst recession since the Great Depression. The administration projects economic growth for the current year will average 3.1 percent, which is in line with private forecasts.

On the tax front, Obama wants to raise the top rate on capital gains and dividends to 28 percent from 23.8 percent and impose levies on asset transfers at death, closing what the White House calls the "largest capital gains loophole" in the tax code.

OVERSEAS PROFITS

The president's plan pits drug and technology companies that keep earnings overseas out of reach of U.S. taxes against firms that build roads, bridges and mass transit systems. He wants to fund $478 billion in infrastructure work over six years in part by applying a 14 percent tax to profits that are parked outside the country.

Obama's corporate tax plan, which creates a narrow opening to talk about a business tax overhaul with Republicans, includes a 19 percent levy on future foreign earnings for U.S. companies. The administration is no longer insisting that overseas profits be taxed at the 35 percent top U.S. corporate rate.

Hes also setting up a confrontation between Republican defense hawks and spending hawks by offering a $38 billion increase for national security programs over current budget caps in exchange for $37 billion more in discretionary spending for domestic programs. His proposal to relax those spending limits, known as sequestration, would put discretionary spending for fiscal 2016 at $1.091 trillion, which is $74 billion above the limits.

DISCRETIONARY SPENDING

Those discretionary appropriations, both the total amount and the details of how to allocate the money among federal agencies, are what Obama and Congress must agree on to keep the government running past the start of the fiscal year on Oct. 1.

On education, Obama is proposing to make community college free for students who keep their grades up and make progress toward graduation, a plan thats estimated to cost $60 billion over 10 years.

His budget would also aim at the other end of the educational spectrum, putting an additional $1 billion into Head Start, setting aside $750 million for universal pre-school and expanding access to child care for 1.1 million more children under the age of 4 by 2025, according to a fact sheet released by the White House.

One area that figures to get attention from Congress this year is cybersecurity. In the wake of hacks against banks, Sony and the U.S. postal service, the White House and lawmakers in both parties have been searching for ways to deter attacks, respond to them when they happen, and, in some cases, retaliate.

Obama would spend $14 billion, spread across government agencies, to bolster cybersecurity.